The Steel Success Strategies XXVII conference in New York in June featured three keynote speakers who each offered a somewhat different perspective on the industry and its prospects and problems.

ArcelorMittal SA chairman and chief executive officer Lakshmi Mittals message, in short form, was that a protracted period of low operating rates is coming in the European Union so steelmakers should batten down the hatches to survive the impending storm. Luxembourg-based ArcelorMittal will concentrate on vertical integration and research and development, and has no interest at this time in acquisitions that would increase its steelmaking capacity.

John Surma, chairman and chief executive officer of U.S. Steel Corp., Pittsburgh, saw shale gas and increased drilling in the Gulf of Mexico as a great opportunity for the companys tubular business, although he was concerned about the growing level of tubular imports.

Nucor Corp. chairman and chief executive officer Daniel DiMicco was in fine form as he excoriated foreign suppliers who abuse the U.S. market. However, he reserved most of his scorn for Washington policymakers who cannot see the opportunity to lift the economy out of recession with infrastructure spending and an all-out assault on the negative trade balance.

Among the best papers presented at the conference co-sponsored by AMM and World Steel Dynamics Inc. were those delivered by plant builders describing the leading edge of steel technology for those interested in the future direction of the industry. The quality of the conference was improved by moving the panel from Wednesday afternoon (when people were checking out and leaving town) to Monday afternoon.

A paper from Cliffs Natural Resources Inc. described what had to be one of the great success stories in the industry. Under a new leaderchairman, president and chief executive officer Joseph A. CarrabbaCleveland-based Cliffs has doubled its sales, diversified its risks and transformed from a sleepy pellet supplier to a very profitable player in the world industry.

Perhaps the most interesting theme to emerge from the conference was the newfound importance of raw materials to the finished cost of the steel product. U.S. Steel historically has enjoyed a strong position in iron ore, and it seems to be looking for a way to capitalize on this asset by coupling it with a direct-reduced iron (DRI) process using low-cost natural gas; ArcelorMittal is focused on greater upstream integration to avoid open-market purchases of iron ore; Nucor is building a new plant in Louisiana that will produce DRI to displace pig iron purchased from Brazil; AK Steel Corp., Middletown, Ohio, has made investments in both coal and iron ore that aim for 50-percent self-sufficiency; and Steel Dynamics Inc., Fort Wayne, Ind., has done extensive work on the development of its iron nugget process, seeking greater autonomy on the raw materials front.

Frank Bekaert, a director at McKinsey & Co. Inc., showed a bar graph demonstrating that a basket of iron ore, coal and scrap historically accounted for 30 percent of finished product cost. Contrast that with current costs, where the same basket would account for 70 percent of finished product cost. Although there has been some retreat from sky-high iron ore and coal costs, many executives are acting on the belief that we will never return to the good old days of cheap coal and iron ore.

Indeed, there are compelling reasons to acknowledge that new iron ore developmentsas contrasted with existing production siteswill be much more costly. Alexey Mordashov, chief executive officer of Russias OAO Severstal, cited the availability of only lower-grade iron ore deposits in politically riskier jurisdictions going forward; the lurking suspicion that existing mine depletion is underestimated; and that capital expenditure inflation and operating-cost inflation will add to the risks in new ventures.

The other common thread that emerged from the conference was that economic growth has slowed around the world, and steel markets that were once projected to thrive wont be realizedas scheduledso we are entering a period of world oversupply of steel. Although there are significant regional differences, China is clearly the 800-pound gorilla in the game, and it therefore should be up to China to absorb the lions share of the punishment associated with the necessary consolidation. However, that kind of thinking is called hope over history, as China has regularly announced on an annual basis that it intends to shut down unprofitable, polluting capacityand then nothing happens. Planners at the federal level of the Chinese central government are quite competent in identifying which plants should be shut down, merged, etc. However, the provincial politicians have had the last word so far, and there have been no major shutdownssteelmaking capacity increases every year.

With the slowdown in Chinese growth, the recession and uncertainty in the European Union, as well as the stalled recovery in the United States, steel markets look to be oversupplied for the foreseeable future.

Thomas C. Graham is a founding member of T.C. Graham Associates. He is a former chairman and chief executive officer of AK Steel Corp., president and chief executive officer of Armco Steel Co. LP, chairman and chief executive officer of Washington Steel Co., president of the U.S. Steel Group of USX Corp. and president and chief executive officer of Jones & Laughlin Steel Co. His column appears monthly.

He invites readers comments and can be contacted at tom.graham@tcgrahamassociates.com.

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